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Why Super Micro Computer Stock Was Sliding This Week

Source The Motley Fool

Shares of Super Micro Computer (NASDAQ: SMCI) were heading lower this week as a combination of a sell rating from Goldman Sachs and a broader sell-off in artificial intelligence (AI) stock, which weighed on the maker of AI servers.

According to data from S&P Global Market Intelligence, the stock was down 16.5% for the week as of 3:12 p.m. ET on Thursday.

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An engineer in a data center using a laptop.

Image source: Getty Images.

Is Super Micro Computer in trouble?

The market tends to heed ratings changes from Goldman Sachs more so than other investment banks and research firms, so it wasn't surprising that the stock pulled back on the downgrade.

Goldman Sachs downgraded Supermicro to sell with a price target of $32, arguing that the risk/reward in the stock is now unfavorable. It also noted that competition in AI servers is heating up in response to Supermicro's sales surging last year. Finally, it said that its gross margins, which are already low, could decline further due to new competition.

Supermicro stock fell as much as 6% on Monday, though it recovered most of those losses by the end of that session, as the broad market surged on hopes for easing trade war tensions.

However, two days later, Supermicro stock was falling, in line with the broad market partly because of President Donald Trump's announcement of tariffs on foreign vehicle imports. AI stocks fell sharply as investors view that sector as being one of the most at risk of a recession.

What's next for Supermicro

Super Micro Computer does seem to have put the earlier concerns about the delay in filing its annual report behind it, but the business still needs to perform in order for the stock to do well.

In addition to revenue growth, it's key for the company to maintain or expand its already-narrow gross margin. In its second quarter, it reported a gross margin of just 11.8%, and operating income fell slightly.

Competition could already be weighing on the stock, though its growth is still strong. Supermicro looks well priced right now, but it will have to defend its market share and margins in order for the stock to be a winner.

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Jeremy Bowman has positions in Super Micro Computer. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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